Netflix’s Plans for Global Domination May Hit a Few Speed Bumps (Updated Jan 22, 2015)

In its 4Q14 Earnings Release, Netflix announced strong growth, with international subscribers growing faster than forecasted, while U.S. subscribers were in line with expectations.

At the end of 2014, Netflix supported 57.4 million streaming subscribers, with another 5.8 million DVD subscribers (U.S. only).

During 2014 (2Q14 to be exact),  Netflix announced its plans for a major European expansion that begun in September 2014 – adding Germany, France, Switzerland, Austria, Belgium and Luxembourg to its list of available countries.  At the end of  2014 – Netflix services were available in 13 Western European countries, representing 75% of total broadband subscribers within this region.  The only notable missing countries are Italy, Spain and Portugal.

In September 2104, Netflix announced plans to launch services in Australia and New Zealand in March 2015.  After this launch, Netflix services will be available to 40% of fixed broadband subscribers.

Netflix

Netflix has been steadily increasing its reach for its service since its initial international launch in Canada in November 2010, which coincided with the launch of its stand-alone streaming package.

Based on the success of the current expansion plans, Netflix now believes it can expand from 50 countries to 200 countries by the end of 2017.  Strong broadband adoption – whether fixed or mobile – combined with rapid growth in the use of smartphones, tablets and Smart TVs – all capable of streaming video – plays a key role in Netflix’s expansion strategy.

Growing the U.S. Even Further

In the U.S. market, Netflix has 39.1 million streaming customers (approximately 39% of fixed broadband subscribers) and has set a long-term goal of reaching 60 million to 90 million U.S. subscribers – giving it a penetration of greater than 80% – a lofty goal indeed.

The question is whether or not that is even possible.  Yes, it has the best brand recognition of any streaming service available, but it definitely faces some strong competition from Amazon Prime as well as services such as Comcast’s Xfinity Streampix – which will be available to a large portion of customers – at little or no charge – if Comcast and Time Warner Cable do merge.  And let us not forget the potential AT&T/DIRECTV merger – which will also likely result in offering a streaming services available to its subscribers.

While original content has definitely boosted subscriber numbers – Netflix is no longer alone in this category  – as Amazon has become very aggressive (and successful) with its own original content (and with deeper pockets than Netflix).

International Markets Have Different Challenges than U.S.

From an international perspective, Netflix supports 18.3 million subscribers and is expecting more than 100 million long term – a fairly challenging goal.  In order to hit this target – it would be essential for Netflix to launch in big markets such as China and Japan.

The biggest advantage Netflix has in the U.S. – is limited competition and strong brand recognition. However, from an international view – the challenges can vary significantly from region to region and even country to country.

Within the European continent – its biggest challenger is Amazon Prime, which is available in multiple countries.

In France – the challenge is not necessarily competition, but content rights.  In fact, Netflix has already sold the rights to its own in-house production – House of Cards – to Canal Plus. Additionally,  French regulation prohibits the online release of films until at least three years after theatrical release and as a distributor they have to help pay for film production in France to comply with national rules.

In Germany,  it faces competition from Sky Deutschland’s Snap service – a recent entry into the streaming content market as well as strong VOD content from T-Online.

In CALA,  Netflix is facing increasing competition – not only from incumbent Pay-TV operators, but also the pending AT&T/DIRECTV merger – who will bundle a broadband service together with its own streaming service to attract subscribers – not to mention offering live sports – such as FIFA World Cup – which are higher in demand than other types of content.

Expanding from 50 to 200 countries will provide its own host of challenges.  Ranging from broadband adoption/availability to whether or not it will be able to secure global content licensing for much of its content.  Additionally, it will be difficult (not to mention expensive) to provide localized content to that many different markets – something that has been key to its current strategy.

So what is Netflix’s strategy?

When I think back about my own Netflix experience – it was all about the movies and being able to see first run as soon as it was released on DVD.  However, when they introduced the streaming service – the content was substantially different.  At that time, only about 10% of my queue was available for streaming.

Today – while 1st run movies are still available (albeit in a much later release window) – much of the streaming content is focused on television series, including an increasing library of originally developed content. This original content development will play a key role in Netflix’s international growth – as they will be able to develop content that has specific appeal within each country.

Additionally, Netflix plans to place more emphasis on exclusive content – with the “intent to expand the content library meaningfully” – investing $3.2 billion globally on content, with the content selections moving toward higher-rated and exclusive titles.  However it is not expected to include any live content or sporting events at this time.

Another path Netflix is exploring is partnering with mobile operators to offer its services – as it it has done with Vodafone UK.  As of July 2014, anyone signing up or upgrading to a Vodafone Red 4G plan can opt for Netflix as their entertainment pack of choice.  The downside is that streaming Netflix will definitely count against the monthly data cap – using up most monthly data limits in record time.  In this scenario – Wi-Fi remains a much better option than most mobile data plans.  

Additionally, Netflix is working with more operators to add its Netflix app their devices. This already includes Virgin Media, BT and TalkTalk in the UK.  Deutsche Telekom in Germany, Bouygues, SFR and Orange in France; Proximus in Belgium and DISH in the U.S.

But the reality is that in order to reach that 100 million subscriber mark outside the U.S. – it will likely have to make a move into the Asia Pacific market – most notably China, Japan (where Hulu is currently available and now owned by Nippon TV) and Korea.  In Japan and Korea,  strong broadband penetration and fast speeds are the norm, and both countries have a proven appetite for streaming content.

For China – clearly the largest global market – Netflix continues to explore its options with hopes of launching a small service centered on original and globally-licensed content.

Will Netflix dominate the Pay-TV landscape?

It certainly has the potential to have the most paying subscribers of any Pay-TV provider and it has most definitely impacted the business models of nearly all of them.   Consumers may no longer want their MTV, but they definitely want their Netflix.

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